Restraint of trade in franchise agreements
A clause you barely notice at signing can limit what you do for years after you leave. Here is how restraint of trade works in franchising.
What is restraint of trade in a franchise?
Why franchisors use them
A franchisor invests in training you and sharing its system and customer relationships. A restraint stops you from walking away and immediately competing with what you learned, which would undermine both the franchisor and the next franchisee in your area. That rationale is legitimate, which is why courts will enforce reasonable restraints.
How far a restraint can go
- Scope, the type of business or activity you are restrained from.
- Area, the geographic zone the restraint covers.
- Duration, how long after the agreement ends it applies.
- Reasonableness, a restraint that is broader than needed to protect legitimate interests may be unenforceable.
What it means for you
The practical impact is on your exit and your next move. If you plan to stay in the same industry, a wide restraint could stop you for a year or more in your area. Whether a specific restraint is enforceable is a legal question that turns on reasonableness, so have a franchise lawyer review it before you sign and again before you exit if a dispute arises.
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Frequently asked questions
What is a restraint of trade clause in a franchise agreement?
A clause limiting you from competing with the franchise during the agreement and for a period after it ends, typically barring a similar business in the same area for a set time. Franchisors use them to protect the system and network from a departing franchisee.
Are franchise non-compete clauses enforceable in Australia?
Often, but only to the extent they are reasonable in scope, area and duration. A restraint broader than needed to protect the franchisor's legitimate interests may not be enforceable. Whether a specific clause holds up is a legal question, take advice.
How long does a franchise restraint of trade last?
It varies by agreement, commonly a defined period after the franchise ends, sometimes a year or more, within a defined area. Read the scope, area and duration in your agreement before signing, as it affects what you can do after you leave.
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